M&A Readiness Podcast Series: Minimizing M&A Pension Risk For Buyers and Sellers

With M&A activity on track for a record year in 2016, minimizing pension risk and managing pension costs is critical for both buyers and sellers. Mercer M&A transaction experts Jeff Cox and Chuck Moritt, along with pension risk expert Richard McEvoy, explain how to do this efficiently using Mercer’s Pension Debt Management Solution.

Jeff Cox, Global M&A Transaction Services Leader

Chuck Moritt, North America Multinational Client Group Leader

Richard McEvoy, US Financial Strategy Group Leader

Demystifying pension risk is becoming more and more important to sellers looking to maximize exit price. Defined benefit pension plans raise red flags for potential buyers and can devalue what first appeared to be an appealing transaction. Pension volatility also poses risks for sellers: while short-term volatility is normal for DB pension funds, this can mean major losses within the period of the sale.

A solution that stabilizes the funding process and reduces short-term volatility and helps eliminate buyers’ misconceptions about pension risk can help turn the red flags green. What does a solution like Mercer’s Pension Debt Management solution provide both the buyer and seller?

For the seller:

  • Limit downside risk: This means the seller can protect their agreed-upon purchase price, no matter how much volatility they are exposed to after negotiations close.
  • Clarify the pension debt structure: This allows the seller to easily transfer liabilities as part of the deal.

For the buyer:

  • Clarity: The buyer gets clarity about exactly what they’re buying, what the debt structure is, the cost of the debt, how long the debt is in duration, and the volatility exposure that they’re taking on.
  • Downside volatility protection: As the buyer, you can better determine whether it’s worth it to take on the debt as part of the transaction with this information in hand.

“Pension risk really balloons from the seller and buyer perspective when you’re looking at the impact on the purchase price during a very short period of time,” says Richard McEvoy. “So we look at hedging strategies to deal with that increased risk.”

Another common worry is hidden costs. As our pension expert Richard McEvoy explains, a comprehensive pension debt solution evaluates those costs and provides an overview of the potential impact of equity changes and interest rate changes. It’s all part of the market-to-market evaluation that Mercer provides to simplify the complex issue of pension debt in M&A transactions. 

 

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